Sebi proposes tighter norms for underwriting of IPO, FPO & bonus shares

Capital markets regulator Securities and Exchange Board of India (SEBI) on Wednesday proposed tightening regulations for the issuance of bonus shares by a listed company. The market watchdog released a consultation paper regarding the changes that can be incorporated into the issue of capital and disclosure requirements (ICDR) with the objective of increasing transparency among the listed entities. The consultation paper also proposed streamlining rules for the underwriting of initial public offerings (IPO) and follow-on public offers (FPO). The market regulator has sought comments from experts regarding the same.

The market regulator has proposed that a listed issuer should be eligible to announce its bonus issue only if it has received in-principle approval from the stock exchanges for listing of all the pre-bonus securities issued by the listed entity excluding Employee Stock options (ESOPs) and convertibles shares/warrants. It also said the bonus issuance to shareholders should be made in dematerialised form only.

At present, the Companies Act, 2013, provides for certain conditions for the issuance of bonus shares such as issuance out of its free reserves, securities premiums, or the capital redemption reserve account.

The proposal by the market regulator comes after it observed several discrepancies regarding the issuance of bonus shares between the listed capital and issued capital in the past. "It is observed that in some instances, an issuer announces bonus issue while it has not received in–principle approval for listing and trading approval from stock exchange(s) for its previous issuances and such previous issuances has certain non[1]compliances such as issuing shares without taking in-principle approval from stock exchanges or failure to follow pricing guidelines / non-compliance with regulatory provisions etc. In such scenarios, the issuer may have issued shares but would fail to get in-principle approval for listing and trading approval for such issued shares," the market regulator said.

According to the market regulator, due to the mismatch in issued shares and listed shares, stock exchanges may find it difficult to grant in-principle approval for the bonus issue.

"As long as such mismatch exists between listed capital and issued capital, Issuer Company may not be considered eligible to announce bonus issuance as bonus issue announcement is price sensitive information and it is imperative that the bonus issue is implemented in a timely manner," SEBI said.

For streamlining rules for the underwriting of FPO and IPO, the market said the company, which is planning for IPO, should appoint merchant bankers or stock brokers, registered with the board, to act as underwriters, to cover under-subscription in the issue, and before filing the red herring prospectus, "enter into underwriting agreement indicating the maximum number of specified securities which they shall subscribe to, either themselves or by procuring subscription, at the predetermined price not less than issue price."

"The issuer shall, prior to filing the prospectus, enter into underwriting agreement with the lead manager(s) and syndicate member(s), indicating therein the maximum number of specified securities which they shall subscribe to, either themselves or by procuring subscription, at the predetermined price not less than issue price to the extent of rejection of valid bids procured by the lead manager(s) or their respective syndicate member(s)," the market regulator said.

In case of the FPO, SEBI has proposed the company should appoint lead managers and syndicate managers as the underwriters for the issue.